The Benefits of Car Title LoansCar title loans have grown in popularity over the past few years mainly due to the tough economic conditions which many Americans still face. Traditional lending institutions, such as banks and credit unions, tightened their lending requirements when the financial markets crashed nearly 5 years ago and, for the most part, those standards are still in place today. For people who have seen their credit ratings drop and their home values tumble, finding quick access to cash funds in today's financial climate can seem like a nearly impossible task.
This situation helps explain why car title loans have become a popular way to obtain cash funds when there is a financial emergency and time is of the essence. A car title loan is basically a short-term loan which uses your car as collateral. In return the borrower receives a certain amount of cash which will then have to be repaid within a very short period of time- typically one month.
There are advantages to car title loans. These include the following:
- Car title loans provide the borrower with quick and easy cash. Approval times vary but generally a customer can have the cash in hand within a day.
- Most car title loan companies do not run a credit check on the borrower. Therefore, individuals with lower credit scores and poor credit histories can take advantage of car title loans. Since the loan itself is secured with the applicant's vehicle, the approved loan amount is based on the value and condition of the actual car.
- There is very little paperwork involved. Most car title loan companies will ask for proof of income but the massive amount of forms and other paperwork required by banks is not needed for a car title loan.
- The borrower is still able to use the vehicle while the loan is outstanding so there are no worries about transportation. The financial lender will require that you give them a set of keys to the vehicle until your loan is fully repaid.
As with most things in life, there are also two sides to the car title loan story. While the advantages listed above can seem like the perfect solution to an emergency financial need, whenever you borrow money it is a serious matter that can include significant risks. A car title loan can cost you large sums of money with higher-than-normal fees and interest rates. It can also put your personal vehicle in jeopardy if you ever default on your loan. You should carefully consider the following risks before committing to a car title loan.
Car title loans come with very high interest rates. Most car title loan lenders will charge the maximum amount of interest that your specific state will allow. According to the Consumer Federation of America, most car title loans are issued for a pre-determined amount of time (usually one month) and the interest rate averages about 25% per loan period. This means if you are unable to repay your loan at the end of one month and have to extend your loan, you will be charged with the same interest rate for the next four weeks. As an example, if you take out a car title loan with an interest rate of 25% and it takes you 12 months to repay the loan, your APR (annual percentage rate) will be 300% of the original loan amount.
2. Losing Your Vehicle
A car title loan is a secured debt. This means that you must offer collateral to the lender in the event of a default on the loan. In the case of a car title loan, that collateral is your personal car. If you are unable to fully repay your loan, the lender has the legal right to take your vehicle and sell it. The lender can also keep any profit from the sale even if you have made previous payments on the loan. If the sale amount is less than the original loan amount you borrowed, you may also be held liable for paying the difference. In additional to potentially paying thousands of dollars on your loan and still losing your vehicle, you will now have no means of transportation to get you to work and for everyday living needs.
3. Payments and Fees
The fees that car title loan lenders charge can be unreasonably high. Some lenders charge high interest payments during the life of the loan and also require a balloon payment at the end when the loan is due to be paid off. For example, if you borrow $2000 at an interest rate of 20%, your monthly interest payments will be $200 per month for however long you keep the loan. Then at the end, to get your car back free and clear, you will have to pay the total balloon payment of $2000 (the original amount you borrowed). This can put you in a very dangerous financial position. Plus there is the additional risk of possibly losing your vehicle.
Always borrow responsibly. Car title loans can be a quick and easy way to access emergency cash funds. However, you should always carefully consider your personal financial situation and fully evaluate the benefits and risks before committing to a car title loan. Short-term loans such as these are designed to be repaid quickly. They should not be considered as a solution to long-term debt problems.